iPhone Subsidies Destroying Consumer's Perceptions

Did you know that an iPhone or a new Android phone costs a lot more than we are led to believe? Most of the time we only consider the cost of the device when we sign up for a new contract with our cellphone providers. Usually the newest technology will run you anywhere from $99 all the way up to $399, but there's more to it than that.

Service providers like Sprint, AT&T, T-Mobile, and Verizon subsidies the cost of the phones. This means that they have to figure out a way to make up the difference between what you paid and what they owe the manufacturer for the phone. So if Verizon sells you an iPhone for $299 and it actually sells for $599, then they have to come up with $300 somewhere.

Where do they make up the difference? In the contract. Over the two year duration of your contract they are paying Apple, Samsung, or Motorola the difference for your device. The cost is passed on to you, but you don't realize it because it's hidden in your monthly payments. It's like buying a Cadillac for the price of a Chevy Cobalt.

The only difference is the gas they sell you to power the low-priced Caddy costs $2 more per gallon than it would if you bought the Cobalt. If you consider all the gas you burn over the duration of ownership, you didn't really get the Caddy for the price of the Cobalt. Many think this is deceptive and not healthy for consumer perceptions.

At the rate which new technology is flooding the market, this Caddy for Cobalt price strategy is causing consumers to belittle the inherent value of their current device. It is a problem and it was the subject of debate at a recent technology summit where T-Mobile Chief Marketing Officer, Cole Brodman had to speak up and offer his opinion on the practice.

"Purchasing phones at steep discount (subsidized by wireless carriers) devalues the incredible technology innovations coming to market. It distorts the cost of devices and creates an uneven playing field for OEMs, carriers and retailers alike. Many Americans don’t realize the actual cost of the phones they’re purchasing with a two-year contract because the cost of that phone is included in the cost of their data plan and the fees associated with their contract. We’ve also unwittingly created a disposal marketplace for some pretty amazing products."

While there is no clear answer as to how we can convince consumers that their devices have a more inherent value than what they had to fork over just to get the newest technology in their hands, T-Mobile has launched a new series of plans that rewards customers for either sticking with their phones or purchasing new ones at an unsubsidized cost.

Brodman comments on the new plans:

"These plans break with the subsidy model. Instead, customers pay full price for a device in our line-up or set up payments in low, monthly installments. They can also bring their own device to our network. In return, we give them our most affordable rate plans."

Despite the sluggish US economy people don't seem reluctant to spend their hard earned dollars on new technology and the latest devices. It seems manufacturers and marketeers are always finding new ways to entice us and disguise the true costs involved with new trends, but these expenditures always have to be dealt with in the end.

Brodman address this sentiment in his comments:

"In the future, my hope is we will see the U.S. industry follow our lead and move away from the subsidy-only model. Not only would this help level the playing field and foster competition, it would also help consumers by keeping rate plans affordable, providing more transparency in how they purchase wireless and it could encourage a robust, consumer-driven market for affordable (yet still amazing) used smartphones and tablets."

If you did carry-over your last device to a new contract, you should inquire about your plan. You may have a device coming your way that you are already paying for anyway, hidden in the cost of your monthly bill. Don't let those dollars go to waste. If your contract has ended, ask about lowering your monthly payments based on the fact that your device should already be paid for.